Hot Chili: Positive Drill Results, but More Detail Needed

Hot Chili (ASX:HCH) climbed 10 percent last week on the back of more positive drill results from its Alice prospect, located immediately adjacent to its flagship Productora copper-gold–moly project in Northern Chile.

Results include thick intersections of low- to moderate-grade mineralization, including 204 meters at 0.6 percent copper and 0.1 g/t gold. The first batch of drill results from Alice, released in November 2014, includes 151 meters at 0.4 percent copper and 0.1 g/t gold; these results suggest that a substantial body of copper mineralization exists at Alice, but the area has yet to be drilled out.

The company has said that Alice is likely to be a porphyry copper system, which is in contrast to the Breccia-style orebody at Productora. That suggests they represent different parts of a large and structurally complex copper system, and opens the possibility that additional mineralization may be found in the near region.

The market seems to have seen last week’s results as positive, perhaps because Alice lies only 400 meters from the edge of the proposed Productora open pit and so could add tonnage without any transport penalty.

And indeed Productora requires tonnage. The resource at the project currently sits at 214 million tonnes at 0.48 percent copper, 0.1 g/t gold and 138 ppm moly, but the current open-pit reserve has a projected mine life of only nine years as a result of the uncertain economics of deeper low-grade ore and because a large component of the resource is oxide and currently classified as waste in the absence of a viable processing solution. The addition of more shallow sulfide material with the potential for a small lift to head grade could thus add significantly to the economics of the whole project at a time when copper projects globally are under pressure due to depressed prices.

Productora has other issues as well. The grade remains on the lower side, and up until only recently, the project was somewhat stranded as it was situated on a small lease, surrounded by leases of a larger competitor, Compania Minera del Pacifico (CMP); there was thus limited room for the development of a mine and for the necessary transport and water infrastructure. Those issues were resolved in late 2014, when an agreement was reached with CMP to allow infrastructure development over its leases in return for a 17.5-percent stake in Productora and the right to purchase an additional 32.6-percent stake (for a total of 51 percent) for a minimum of US$80 million following the completion of a prefeasibility study (PFS).

While probably necessary at the time, with the PFS due for completion in early 2015, the deal effectively takes Hot Chili off the table to alternate bids and opens the door to it very soon becoming a junior partner in the project. An additional layer of complexity is thrown over the structure as Hot Chili is currently utilizing a partially drawn debt facility from Sprott (TSX:SII) to fund its work, a facility that has some security over the assets.

Though market participants have suggested that the current copper price drop is likely to be brief, Productora is in a difficult position. It is low grade, has a large, metallurgically complex oxide component, requires substantial infrastructure, has fluid ownership structure and as yet, little information has been forthcoming related to its likely development and operational economics.

That is likely to change in coming months as the PFS is released and CMP makes a decision on whether to exercise its option to move to a majority stake, but for the moment, uncertainties abound.

Securities Disclosure: I, Brad George, hold no investment interest in any of the companies mentioned in this article.

Brad George is a geologist by trade, and has spent over 25 years working in the mining industry around the world in a variety of capacities. Primarily focused on exploration, Brad has gained extensive experience in iron ore, base metals and gold on five continents. He has extensive experience in the management of public resource companies.

Upon completing an MBA, Brad spent several years in London as a partner in a boutique brokerage house, developing a franchise as a rated mining and metals analyst. Brad now resides in Perth, Western Australia.